According to Xinhua News Agency, on the evening of July 23rd, Japanese Prime Minister Yoshihide Suga reiterated his commitment to staying in office during a media interview in Tokyo. In the recent Senate national election, the ruling coalition failed to achieve the goal set by Suga, losing the majority of seats and suffering a crushing defeat. Traditionally, as the leader of the party, Suga should have resigned. However, at this time, he announced his continued stay in office, citing the ongoing U.S.-Japan trade negotiations. However, after President Donald Trump of the United States announced a trade agreement with Japan on July 23rd, Suga seemed to lose his excuse. The question now is: Is there still a possibility for Suga to remain in office?
After assuming the role of Prime Minister of Japan, Suga experienced three major defeats for the ruling Liberal Democratic Party (LDP) in the House of Representatives national elections, the Tokyo Diet elections, and the Senate national elections. According to tradition, he should have resigned long ago. However, the LDP’s defeats seem not entirely attributable to him. Since April 2022, Japan’s consumer price index has been above 2% for three consecutive years, making inflation difficult to reverse. Although this inflation was mainly caused by international factors, over three years of inflation has resulted in personal income growth rates falling short of the rate of price increases, leading to a downward trend in real living standards for the public. Japanese citizens hope that the government can introduce effective policies to escape from the state of high prices and hardship. Suga, who has repeatedly broken promises without responsibility, clearly cannot fulfill such duties. However, having chosen someone like this as the leader of the LDP, the outcome not only fails to formulate effective policies but also blurs the image of the LDP in the eyes of the Japanese public. This time, many voters who previously supported the LDP turned to support the emerging right-wing parties, which stemmed from the LDP’s own lack of clarity in its direction.
However, financial markets have given positive feedback for Suga’s statement about staying in office.
The exchange rate of the Japanese yen quickly rose from 148 yen to 147 yen, and on July 22nd after the holiday, the Japanese stock market saw a positive buying trend right at the opening. This indicates that the market temporarily does not need to worry about an expansionary Prime Minister worsening the market environment. In fact, in this Senate election, voters’ main concern is still the persistently high economic issues. To cater to voters, the ruling Liberal Democratic Party proposed a “buying votes” policy by distributing 20,000 yen in cash to each citizen, while the Constitutional Democratic Party and other opposition parties focused on lowering the consumption tax as their main economic strategy. However, implementing the Liberal Democratic Party’s policy would require 3.3 trillion yen, whereas implementing the opposition party’s policy means the government will reduce its revenue by 4.8 trillion yen to 15.3 trillion yen. With what financial resources can they meet such demands? It’s highly likely that they will have to rely on increasing national debt. Clearly, this is not an ideal solution for Japan, which already has a high debt burden. The financial markets are optimistic about Masaaki Aso staying in office, probably believing that he, who is known for his ability to break promises, might forget his election campaign pledges and prevent further deterioration of Japan’s fiscal environment.
However, Aso might forget his election campaign promises, but he must face the awkward minority situation in both houses of Congress after the election. Without the support of the opposition parties, Aso’s government will be unable to implement any policies. During the Senate election period, there were criticisms that Aso was absent from the campaign sites. In reality, it wasn’t because Aso himself didn’t campaign, but rather that when he did, he failed to leave a lasting impression on the voters. Therefore, after the election, Aso’s government had no choice but to compromise with the opposition parties. In that case, the Liberal Democratic Party’s promise of distributing cash could be implemented, and the opposition party’s proposal to lower the consumption tax could also be realized. In that case, the Japanese government would have to run wild on the path of expanding its finances.
As a result, the Bank of Japan (BOJ), which was originally scheduled to raise interest rates in September this year, finds itself in a difficult position. After escaping from its negative interest rate policy, the BOJ has been actively seeking opportunities to raise rates. Although raising interest rates could have certain negative impacts on Japanese businesses, the persistent inflation in Japan, with prices remaining high for three years, has caused difficulties for the national living standards. The BOJ should adopt a monetary policy that cools down inflation. However, if the Japanese government implements an expansionary fiscal policy, the BOJ will find it challenging to act on interest rate hikes. If the BOJ fails to raise rates promptly, it will inevitably lead to a downgrade in the rating of the BOJ’s large holdings of Japanese government bonds, thereby causing further increases in the yield on long-term government bonds. Some have predicted that the yield on Japanese long-term government bonds could rise to 1.6% within the near term. Such an increase in bond yields is likely to weaken the effectiveness of policies such as tax cuts and distributions by the Japanese government. To prevent a downturn in the Japanese economy, Japanese voters hope for a prime minister who can truly guide the nation out of its difficulties. However, given the dispersed voting results in this Senate election, there is currently no suitable candidate.
Nevertheless, Ishibuchi Shinzo still faces the risk of resignation. Moreover, Trump’s July 23rd trade agreement with Japan was actually a final blow to Ishibuchi Shinzo. While he emphasized his reappointment was for implementing the US-Japan trade agreement, his reasoning was rather weak. If protecting the lives of Japanese citizens means not scrutinizing the negotiation items after the talks conclude but insisting on Japan’s positions during the negotiations, many analysts believe that Japan has compromised in its negotiations with the United States and did not achieve its original goals. Therefore, whether or not Ishibuchi Shinzo will stay in office is now irrelevant to the actual impact of the US-Japan trade agreement on Japan.